INTC: Cheers for Resilience; Will Haswell Tip the Balance?

By Tiernan Ray

Shares of Intel (INTC) are down 7 cents at $21.84, after the company last night beatQ1 expectations, and put up a better-than-expected Q2 revenue view, while reiterating its intention to grow revenue this year.

During a conference call following the report, outgoing CEO Paul Otellini remarked that he has done 80 calls with the Street since 1993, and offered his perspective on the company with a month left in his tenure.

There are no ratings changes, that I can see, but analysts are impressed with Intel turning in better results despite a sharp PC sales decline last quarter.

There’s a rather sharp difference of opinion, as you’d imagine, between bulls who believe that the company’s Haswell processor will improve sales of ultrabook computers, and bears who think nothing much can change in a weak PC market:

Bullish!

Vivek Arya, Merrill Lynch: Reiterates a Buy rating and a $28 price target. “Street continues to under-appreciate the structural value in Intel’s two to three year manufacturing lead vs. foundries, its most power efficient (vs. ARM) and highest performance 2H portfolio refresh in all-touch ultrabooks, cloud servers, tablets/smartphones, and its ~$1bn inventory depletion in the past
two quarters. Q1 results/Q2 guide were better than gloomy PC market trends,
showing yet again Intel’s multiple levers of outperformance [...] At 10.6x 2014E PE and with 4% dividend yield, expectations remain low and stock is well setup to outperform based on major 2H product refresh, in our view. New CEO announcement (expected by mid-May) could be next catalyst [...] Most power efficient 2H portfolio refresh 1) Haswell processor for $499-$599+ touch-enabled all-day battery life capable laptops and convertibles; 2) Bay Trail quad-core processor for Windows and Android tablets, sub $299 laptops/desktops; 3) Ivy-Bridge and Avoton server processors to drive double digit sales growth in enterprise, cloud servers, storage and high performance computing. Towards year-end/early 2014 we expect Merrifield, the world’s first 22nm tri-gate based smartphone processor chip.” Arya cut his estimate for this year to $53.74 billion in revenue and $1.91 per share in profit from a prior $54.65 billion and $2.01.

Ross Seymore, Deutsche Bank: Reiterates a Buy rating, and a $26 price target. “Intel’s quarterly results proved resilient in the face of lower PC demand as the company continued to benefit from product mix and an improving cost
structure. ASPs were up modestly in the quarter and the company made initial
gains in tablets (unit doubled) across both Windows & Android. Intel lowered
full-year capex by $1b but spending will remain a headwind to FCF through
2013. Demand trends should improve modestly in 2H13 and we expect Intel is
to take share across the broader computing market over the next 18 months.” Seymore cut his estimate for 2013 to $54.5 billion and $2.03 per share in net profit from a prior $55 billion and $2.13 per share.

Daniel Berenbaum, MKM Partners: Reiterates a Buy rating and a $24 price target. “[Q1 results] while admittedly uninspirational on an
absolute basis, were better than very low expectations. A gross margin trough should offset lackluster PC client (better than feared but we still model PC client down 9% y/y 1H13), and the Haswell launch and more attractive PC form factors (sub-$600 touchscreen ultrabooks with all-day battery life) against easy comps should lead to reasonable 2H numbers. Tablet unit shipments are now outstripping mobile PCs, but many of these are low-end devices (e.g., 7-inch e-readers), not PC replacements – it strikes us that there will always be a demand for computing power and “traditional” functionality – even if monopoly-type profits are clearly a thing of the past, the bear case that in five years INTC will only be selling $20 chips seems overblown.” Berenbaum cut his 2013 estimate to $54.2 billion and $2.02 per share in net profit from a prior $54.4 billion and $2.03 per share.

Bearish!

Alex Gauna, JMP Securities: Reiterates a Market Perform rating on Intel shares. “We continue to believe the stock will move predominantly sideways as it is caught between the headwind of eroding PC fundamentals and profitability and the downside support from its >4% dividend yield. In our view, the downward reductions in planned 2013 Cap Ex spending and inventory speak to the underlying weakness of the market and outlook and we note with caution that the Haswell transition is proving more punishing to gross margins than those of the prior two years [...] We do not anticipate Haswell will emerge in meaningful mass market mobile SKUs (Ultrabook, tablet, convertible) until C4Q13.” Gauna leaves unchanged his estimate for $52.5 billion in revenue this year and $1.85 per share in profit.

Blayne Curtis, Barclays Capital: Reiterates an Equal Weight rating on the shares and a $20 price target. “Revenue of $12.6B was in line with consensus and ahead of expectations for a miss. PCCG revenue ($7.99B) was slightly ahead of expectations, while DCG ($2.59B) and Other Intel Architecture ($0.98B) were slightly below despite solid growth in Cloud and HPC as Enterprise remains slow. GM (56.2%) was below guidance for 58% on higher factory startup costs (-2.5%) and lower unit volumes (-1%) partially offset by reduced excess capacity charges (+1%) and lower inventory write-offs (+0.5%). Capex at ~$2.2B was well below the quarterly run rate of previous guidance for $13B in CY13 and full year guidance is reduced to $12B. Lower Opex ($4.47B) (shifting marketing expenses later in the year) and taxes (16% on resumption of R&D tax credit) resulted in EPS in line with consensus of $0.40.” Curtis raised his estimate for this year to $53.28 billion in revenue and $1.89 per share in profit from a prior $53.09 billion and $1.86 per share based on an expectation sales into enterprise products will improve with overall improving economic activity.

Doug Freedman, RBC Capital: Reiterates a Sector Perform rating on the shares and a $24 price target. “While guidance was better-than-expected, we continue to suspect that part of this is related to Haswell filling a lean PC supplychain. The ability to prematurely shutdown older fabs suggests that products in the marketplace today are not doing well. Consequently, while we acknowledge power/performance benefits on Haswell, we remain skeptical that the architecture will drive a revival of newer initiatives including touch and ultrabook in the PC marketplace. We believe two things can be concluded by Intel’s ability to cut CapEx by $1bil without impacting its sales forecast: 1) its original FY13 revenue expectation were more aggressive than guidance; or 2) the company is becoming more efficient, realizing higher prices for smaller die. However, the continued reuse of capital (this time from 22nm to 14nm) could prove to be a lever to gross margin in the near-future. We do believe that due to the roll-off of start-up costs and bonus back of inventories, gross margins can move higher with limited revenue growth in 2HCY13.” Freedman raised his 2013 outlook from $51.5 billion and $1.93 per share to to $53.5 billion and $2 per share.

Intel’s quarterly results proved resilient in the face of lower PC demand as the
company continued to benefit from product mix and an improving cost
structure. ASPs were up modestly in the quarter and the company made initial
gains in tablets (unit doubled) across both Windows & Android. Intel lowered
full-year capex by $1b but spending will remain a headwind to FCF through
2013. Demand trends should improve modestly in 2H13 and we expect Intel is
to take share across the broader computing market over the next 18 months

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